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Inflation falls to 2.9% in January

The first inflation report of 2024 is in, and it bodes well for price-weary consumers who’ve endured steadily rising living costs over the last two years.

The January Consumer Price Index released by Statistics Canada reveals the headline inflation number rose just 2.9% on an annual basis, following a 3.4% reading in December. That’s well below the 3.3% consensus from economists, and marks the first time the measure has dipped below 3% since March 2021. On a seasonally adjusted monthly basis, CPI fell 0.1% – its first decline since May 2020.

Falling gas prices were the largest contributor to the drop, coming in at 3.2% compared to 3.5% in December, and down for the fifth month in a row. Food costs are also notably cooling, down 3.4% from December’s 4.7%. 

In addition to a lower headline number, the “core” inflation measures that are closely monitored by the Bank of Canada – called the trim and median – also softened, down to 3.4% and 3.3%, respectively.

A step in the right direction for the Bank of Canada

While this month’s reading is a positive step toward the central bank’s 2% target, economists say the BoC won’t be in a rush to react; inflation’s downturn will need to persist for several more months before rate cuts will be on the table.

“It’s just one month folks. Chill. That’s the line I would expect the Bank of Canada to apply here and perhaps by repeating their prior references to taking the ‘ups and downs’ of the measures in stride as one of their Deputy Governors once put it,” writes Derek Holt, Vice President and Head of Capital Markets Economics at Scotiabank.

He adds that while the core inflation gauges have certainly softened, they’re just one month shy of December’s steeper 4.7% and 4.8% readings, their highest since July.

“The Bank of Canada is searching for a more convincing trend. One month doesn’t cut it; call it mean reversion off of a hot prior reading for now and wait for more evidence. The 3- and 6-month averages are now running at about 3¼% m/m SAAR,” he added, pointing to the possibility that this month’s numbers point to a “phase 1” of assessing inflation progress for the Bank.

“Phase 2 requires evidence that this is going to be sustainable. Phase 3 could then begin to discuss when to ease if phase 1 and phase 2 go well. One month’s data doesn’t say much at all about that process. Over reacting to it could come back to bite markets in the tender spots given ongoing inflation risk in Canada,” he writes.

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Rate cuts could come as soon as spring

However, January’s report could firm up timing for rate cuts as early as this spring, posits Randall Bartlett, Senior Director of Canadian Economics at Desjardins, pointing out that the reading puts inflation within the BOC’s 1 - 3% operating band and well below the Bank’s own projections.

“There is a lot to like in today’s inflation release. Every measure of inflation came in below expectations,” he writes. “At 2.9% y/y, headline inflation is starting Q1 2024 off below the Bank’s forecast of 3.2% in the January 2024 Monetary Policy Report. Along with ongoing weakness in the Bank’s consumer and business surveys, January’s deceleration in inflation helps to reinforce the case for rate cuts to begin in Q2 2024.”

Needless to say, all eyes will be keenly peeled for how the Bank is reacting to inflation in its next announcement – and when it may plan to break its holding pattern, after leaving its rate untouched four consecutive times. The Bank of Canada’s next interest rate announcement is scheduled for March 6th, 2024.

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Penelope Graham, Director of Content

Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.